Portfolio Rebalancing
What Is Portfolio Rebalancing?
Portfolio rebalancing is the process of adjusting the allocation of assets in an investment portfolio to maintain a desired balance between different asset classes.
Rebalancing ensures that a portfolio stays aligned with the investor’s target investment strategy.
Why It Matters
Over time, some investments may grow faster than others, causing the portfolio’s asset allocation to drift from its original plan.
Rebalancing helps manage risk and maintain the intended investment strategy.
It also encourages disciplined investing by trimming assets that have grown too large and increasing exposure to underweighted assets.
How Portfolio Rebalancing Works
Rebalancing typically involves:
- selling assets that have increased in value
- buying assets that have declined relative to the portfolio target
Investors may rebalance on a schedule, such as annually, or when asset allocations move beyond a certain threshold.
Example
An investor starts with a portfolio consisting of 60% stocks and 40% bonds. If strong stock market performance pushes the allocation to 70% stocks and 30% bonds, the investor may rebalance to restore the original 60/40 allocation.
Portfolio Rebalancing vs Portfolio Diversification
- Rebalancing adjusts allocations over time.
- Diversification spreads investments across different assets.
FAQs About Portfolio Rebalancing
How often should portfolios be rebalanced?
Many investors rebalance annually or semiannually.
Do robo-advisors rebalance portfolios automatically?
Yes. Many automated investment platforms provide automatic rebalancing.
Can rebalancing trigger taxes?
Yes, if assets are sold in taxable accounts.
Related Terms
